HM Revenue & Customs v Zurich Insurance Company

The appellant, Zurich Insurance Company (“ZIC”), is an insurance company established under the laws of Switzerland and having its head office there. It also has local branches established in many countries in the world, including the United Kingdom, but not, at least in the United Kingdom, as separate bodies corporate. I shall refer to the Head Office and the United Kingdom branch as “HO” and “UK” respectively. ZIC was concerned to introduce into its world-wide business a new financial accounting and reporting system (“the SAP-WW Programme”). This involved the installation of software called SAP and a particular configuration or template called Z-Core. For the purposes of such installation ZIC required the services of consultants. Accordingly it entered into a framework agreement, with effect from November 1997, with Price Waterhouse Management Consultants AG (“PwCAG”), a company registered in Switzerland, to provide those consultancy services.

The services of PwCAG for the purposes of the installation at the premises of UK were supplied pursuant to a series of work orders dated 27th and 28th August 1999. The relevant work was carried out at the premises of UK between January 1999 and August 2000. The consultancy services were supplied by PwCUK as the sub-contractor of PwCAG. The cost was invoiced by PwCUK to PwCAG, by PwCAG to Zurich Leben for HO and by HO to UK.

On 6th November 2002 the respondent, Her Majesty’s Commissioners for Revenue and Customs (“HMRC”), assessed ZIC to VAT at the standard rate on the supplies of services by PwCAG to ZIC under work orders 2 to 10 (both inclusive) in the sum of £2,085,153 on the footing that the place of such supply was the United Kingdom. The validity of that assessment depends on the proper interpretation and application of Article 9(2)(e) Sixth Council Directive on the harmonisation of the laws of Member States relating to turnover taxes (77/388/EEC) (“the Sixth Directive”). That article provides:

“the place where [services of consultants] are supplied when performed for customers established outside the Community..., shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied or, in the absence of such a place, the place where he has his permanent address or usually resides.”

On 30th June 2005 the VAT and Duties Tribunal (Dr John Avery-Jones and Mr Cyril Shaw) set aside the assessment. For the reasons given in their decision of that date they considered that the place of supply was Zurich. HMRC appealed to the High Court, as permitted by s.11 Tribunals and Enquiries Act 1992. Park J, by whom the appeal was heard in February 2006, disagreed with the Tribunal. For the reasons given in his judgment handed down on 23rd March 2006 he considered that the place of supply was the United Kingdom. Accordingly he set aside the order of the Tribunal. This is the appeal of ZIC from the order of Park J.

The contentions of ZIC may be shortly summarised. ZIC points out that the right to appeal from the Tribunal to the High Court under s.11 Tribunals and Enquiries Act 1992 is conferred on a party “dissatisfied in point of law”. ZIC submits that Park J did not respect the limitation of the right of appeal to points of law but substituted his own findings of fact for those of the Tribunal and applied the provisions of Article 9(2)(e) to his findings rather than to theirs. ZIC submits that the Tribunal made no error of law and their decision should have been allowed to stand. Accordingly there are three issues for our determination: (1) whether Park J wrongly substituted his own view of the facts for that of the Tribunal, (2) whether the Tribunal erred in law so as to entitle Park J to reconsider their conclusion and (3) whether the conclusion of Park J is correct in point of law.

In those circumstances the starting point for the consideration of ZIC’s submissions must be the findings of fact made by the Tribunal. By their notice of appeal dated 5th December 2002 ZIC claimed that the place of supply of the services of PwCAG was Switzerland. Their grounds of appeal were further particularised on 12th January 2004 to submit that in the light of the decision of the ECJ in Berkholz v Finanzamt Hamburg-Mitte-Allstadt [1985] ECR 2251 (“Berkholz”), as applicable to questions arising under Article 9(2)(e), the place of supply was Switzerland because that is where the business of ZIC was established and a decision to that effect would not lead to an irrational result. The appeal of ZIC was supported by witness statements of Mr Bottome, the SAP-WW Programme manager between 1st January 1999 and 31st December 2000, Ms Stringer, the Project Director for both the five projects into which SAP-WW Programme was divided and the first of them which dealt specifically with UK Non-Life and Group Services and Mr Warner who had been the VAT manager of ZIC until his retirement in October 1999. Each of them produced voluminous exhibits, amounting in all to 7 lever arch files, and gave oral evidence to the Tribunal. No further evidence was adduced in behalf of HMRC. The appeal occupied the time of the Tribunal from 16th to 19th May 2005. The Tribunal’s decision was released on 30th June 2006.

In paragraphs 1 to 4 the Tribunal set out the issue they had to determine and other preliminary matters. Paragraph 5 contains the Tribunal’s findings of fact. It is divided into sub-paragraphs (1) to (23). In sub-paragraph (1) the Tribunal records that it was common ground that Zurich is the place where ZIC had established its business and the UK is a place where it has a fixed establishment, in each case, for the purposes of Article 9(2)(e).

In sub-paragraphs (2) to (4) the Tribunal set out the nature of the SAP project generally. I should quote parts of them for the explanations they provide. Thus in sub-paragraph (2) the Tribunal explained what SAP was, namely:

“...a set of software tools used by many international businesses to keep business records, prepare accounts, monitor budgets, control costs and handle many other business process needs. Certain core modules were made compulsory throughout the Group. These are known as FI/CO [FI for financial records (comprising general ledger, accounts payable, accounts receivable, fixed assets and special ledger; CO for controlling (which tracks costs and works out profits for management reporting purposes, and comprises costs centre accounting, internal orders and profitability analysis)]. The output from SAP provided management reporting, regulatory reporting (such as insurance company regulation, direct tax and VAT) in sterling and based on UK GAAP [Generally Accepted Accounting Principles] for Zurich (UK), local reporting based on IAS [International Accounting Standards], and also information required by Zurich (HO) for Group reporting in other currencies and based on IAS with an addition for insurance company reporting known as NewZAP. Consolidation worldwide was performed by the output from SAP being passed through another system, Cormis.”

In sub-paragraph (4) they explained Z-Core in the following terms:

“Consistent management information requires common definitions of such things as premiums which is achieved by the use of modules common throughout the group. A standard template, known as Z-Core, was developed in Switzerland for this purpose. The framework agreement (see para 5(6) below) explained it as “…a set of definitions and rules in order to allow the required central consolidation, visibility and overall benefits to be achieved.” The SAP “starter kit” prepared for staff stated: “Z-Core is a SAP design that is intended to deliver group financial and management accounting reports prepared on a consistent basis, from individual business units to the group whilst retaining maximum flexibility for individual business units to add additional local configuration to meet their own local requirements.” Z-Core was the starting point for local implementation and enabled local units efficiently to configure their own SAP systems. Preparation of Z-Core was one of the most costly elements of the entire project.”

As the Tribunal recorded in sub-paragraph (3) the world-wide requirement for software was to be supplied by SAP and the hardware by IBM, in each case pursuant to contracts concluded in Switzerland. In sub-paragraphs (5) to (7) the Tribunal considered the world-wide implementation of the SAP-WW Project in 70 business units in 50 countries over a period of 2.5 years starting in October 1997. They described the chain of supervisory committees based in Switzerland ultimately responsible to the Executive Board of ZIC and the engagement of PwCAG. In respect of the services of PwCAG the Tribunal recorded that PwCAG had been engaged as consultants to the worldwide project under a framework agreement effective from 24 November 1997 (when they had started work) and governed by the law of Switzerland with exclusive jurisdiction given to the Courts in Zurich. The agreement stated the rates for work by PwCAG and other PwC entities. PwC staff were involved at all levels, two of them then based in Switzerland were members of the Implementation Steering Committee and also attended the Strategy Steering Committee as observers. Other PwC staff were appointed to all the overseeing bodies.

The Tribunal dealt with the implementation of the SAP-WW Project in the UK in sub-paragraphs (8) to (20). They described how at UK SAP replaced another system, OLAS, that had been performing similar functions satisfactorily since 1991 and was half way through being upgraded, but had to be abandoned in mid-1998 when the decision was made by HO to adopt SAP worldwide. They recorded that the change had been resisted by senior executives in the UK who were satisfied with OLAS. But as a consequence of a merger the number of employees of ZIC in the UK had increased from about 3,000 to about 21,000 and there were at least 20 different, and incompatible, business and accounting systems in operation in the UK. The problems were reviewed in a feasibility study report for the UKISA region (UK, Ireland and South Africa) made on 21st September 1998 (referred to in sub-paragraph (10)) which:

“stated that there was an urgent need to put in place a new accounting system for the non-life businesses in order to integrate the merged businesses. Another important requirement was that IAS reporting used by the parent company for external reporting was not possible under existing systems. The benefits of SAP were identified. Mrs Stringer allocated some of these to Zurich (HO), such as worldwide transmission of data, easier completion of year-end and interim reporting; others to Zurich (UK), such as easier consolidation of the results of local entities; and the remainder of the benefits accrued to the whole organisation, such as improved management information and easier inter-group charging.”

In sub-paragraphs (11) to (18) the Tribunal dealt at some length with the progress of the SAP-WW Project described in sub-paragraphs (19) and (20) in the following terms:

“(19)

The implementation of SAP by Zurich (UK) was carried out partly by Zurich (UK) staff (60% of the staff, although originally it had been expected to be 75%) and partly by PwC (UK) (40% of the staff) working as a team in Zurich (UK) premises. At the height there were 165 staff working on the project in the UK.

(20)

We infer from the above that Zurich (HO) designed Z-Core in order to provide for its requirement for information prepared on a consistent basis while at the same time enabling it to be configured to meet local requirements. Zurich (UK) required some financial reporting and accounting software, whether the existing OLAS (which was in process of being upgraded) or SAP. It would have needed outside consultancy services to implement any such system. Much of the output from such system would be required by Zurich (UK) even if it were not part of a worldwide organisation. This included its primary accounting needs, management information, and reporting for regulatory purposes, including insurance company regulation and tax. Without such information Zurich (UK) would not have been able to operate.”

Following a change on which the Group Executive Board of ZIC decided on 21st September 1999 but to take effect from 1st January that year the system of invoicing for the services of PwCUK were, as described in sub-paragraph (22):

“PwC (UK) invoiced PwC AG for their services (zero-rated for VAT by virtue of article 9(2)(e) of the Sixth Directive as consultancy services). PwC AG invoiced “Zurich Leben” (whose full name is Zurich Lebensversicherungs-Gesellschaft, which we understand is a member of the Swiss VAT Group), which we shall treat as the equivalent of invoicing Zurich (HO), by two separate invoices both including Swiss VAT at 7.5%, one for 79% of the total which was re-charged internally by Zurich (HO) to Zurich (UK); and another for 21% of the total which was initially re-charged internally by Zurich (HO) to Zurich (UK) and then recharged by Zurich (UK) to Group life companies in the UK within the UK VAT group on the basis that this proportion of the work for the non-life business was of benefit to the life companies. A reverse charge to UK VAT was paid on the 21%.”

The Tribunal concluded with the observation that UK had claimed and obtained capital allowances for corporation tax on the amount re-charged to it totalling £16.7m on the ground, as represented in correspondence with the Inland Revenue, that they were “costs incurred for the purposes of the Branch.”

In paragraphs 6 to 9 the Tribunal set out the relevant parts of Article 9 and the contentions of the parties. In paragraphs 10 to 26 they set out the reasons for their conclusion stated in paragraph 27 that

“...we consider that the supply in question was made to Zurich (HO), and that Zurich (UK) is not “a fixed establishment to which the service is supplied.” We decide that Switzerland is the place of supply.”

Paragraphs 10 to 16 contain a consideration of the decisions of the ECJ in Berkholz, Commissioners of Customs and Excise v DFDS (Case C-260/95) [1997] STC 384 (“DFDS”) and RAL (Channel Islands) Ltd v Commissioners of Customs and Excise (Case C-452/03) [2005] STC 1025 (“RAL”). In paragraph 17 the Tribunal stated:

“We remind ourselves of the test to be applied. Article 9(1) dealing with the place of supply is a deeming provision: “the place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied.” For article 9(2)(e) services, the deeming looks to the customer rather than the supplier: “the place where the customer has established his business or has a fixed establishment to which the service is supplied.” The existence of article 9(3) giving Member States an option (not taken up by the UK) of using a test of “where the effective use and enjoyment of the services takes place” demonstrates that this is a different test from the identification of the customer in the two alternatives in article 9(2)(e), although, of course, it does not mean that the result of the two tests cannot be the same. But it does suggest that the question is not answered primarily by identifying the place where the supply is effectively used and enjoyed. We must choose between the two possibilities on the basis of rationality, economic reality and distortion of competition.”

The Tribunal then considered the problem from the point of view of the place of contracting (paragraph 19), which location bore the cost (paragraph 20), what was done (paragraph 21) and for the benefit of which establishment, Zurich or the UK, the work was done (paragraphs 22 and 23). In the last mentioned context the Tribunal considered:

“...that it was both. The subject matter of the work was the financial results of Zurich (UK) which Zurich (UK) needed for its own regulatory reporting and without which it could not operate. Zurich (HO) were also interested in the results of Zurich (UK) so that it could report the worldwide results and had produced Z-Core in order to receive reports in a form it required. Z-Core only worked if the input from the UK accounting systems was in the right format.

23.

Weighing up these factors in terms of economic reality as understood in DFDS we regard the place of contracting as the most important. We pay less regard to the work being done in the UK because the question is not where did the supply take place (as it is for article 9(2) supplies) but who is the customer. Similarly, in DFDS where the travel took place was not a consideration. We regard the place of benefit as the least important, particularly as neither location received the benefit to the exclusion of the other. If payment for the services had been borne by Zurich (HO) as originally proposed we would regard it as clear that the service was supplied to Zurich (HO). If Zurich (HO) and Zurich (UK) were two different legal persons, these factors would certainly point to Zurich (HO) as the contracting party and the place of contracting and payment, the factor that was given importance in DFDS, however much Zurich (UK) benefited from the service. It would be analogous to the supply by the estate agent in Customs and Excise Commissioners v Redrow [1999] STC 161. But this was changed so that Zurich (UK) bore the costs which points away from Zurich (HO) being the notional contracting party. Does it mean that we should pay less attention to the “calling the shots” factor and treat the service as supplied to Zurich (UK) when the factor of the work being done in the UK is added? We do not think it does. First, Zurich (HO) as notional contracting party remains such because PwC AG looks to it for payment. The bearing of the expense by Zurich (UK) is a subsequent notional contract which is of no concern to PwC AG. Secondly, the change to Zurich (UK) bearing the cost was made for tax reasons, which means we give it less importance in applying economic and commercial reality, but not to the extent of disregarding it. Our tentative conclusion is therefore that the supply was made to Zurich (HO).”

The Tribunal then tested their tentative conclusion for rationality and distortion of competition. They referred to two additional points on which counsel for HMRC had relied and confirmed their conclusion in paragraph 27 in terms I have already quoted. In those circumstances the Tribunal allowed the appeal of ZIC.

By their Appellant’s notice dated 19th August 2005 HMRC appealed from the order of the Tribunal. Their grounds of appeal, in summary, were that the Tribunal had (1) erred in law in failing properly or at all to apply the criteria set out in Berkholz, (2) erred in law in its application of DFDS, (3) erred in law in finding that the services were supplied to HO in Zurich and not UK in the United Kingdom and (4) erred in law in its assessment (for all or any of the six specified reasons) that treating Switzerland as the place of supply would give rise to an irrational result for tax purposes. There is no suggestion in the appellant’s notice or any of the written arguments that there was any appeal from any finding of primary fact. And with his unrivalled experience in this field it is, to say the least, unlikely that Park J could have considered that there was.

The papers for the hearing of the appeal were prepared by the Solicitor for HMRC in accordance with CPR PD52 para 5.6A(1). The bundles included the three witness statements to which I have referred and many, but not all, the extensive documents exhibited to them. At the hearing before Park J counsel for each party referred, without objection from counsel for the opposing party, to various parts of the evidence in order to illuminate or otherwise explain findings of the Tribunal.

In paragraphs 2 to 6 Park J summarised the relevant facts and the issues which arose. I should quote two passages. The first appears in paragraph 4 where Park J, having referred to the chain of invoices continued:

“The result was that consultancy services contracted for by ZIC(HO) in Switzerland but performed for ZIC in the United Kingdom and provided physically at premises of ZIC(UK) were received without the addition of any charge for VAT.”

The second, which appears in paragraph 6, is in the following terms:

“For the reasons which I will explain, I respectfully disagree with the decision of the Tribunal, and I will allow the appeal.”

In paragraphs 7 to 13 Park J set out a summary of the facts necessary to explain his decision. Counsel for ZIC suggested that Park J may not have fully understood the difference between SAP and Z-Core. I do not accept this criticism. Park J set out verbatim passages from paragraphs 5(4) and (20), an explanatory document entitled “Getting Started”, the Feasibility Study to which I have referred and a specimen work order. He had been specifically referred to all those documents by counsel for one party without objection from counsel for the other. In any event, as he correctly observed in paragraph 10:

“This case is not about the VAT consequences of expenditure incurred in connection with the development and design of Z-Core. It is only about the United Kingdom VAT consequences of expenditure on the services of consultants who were engaged to assist upon the installation of SAP into the activities of ZIC(UK).”

He returned to this point in paragraph 13, as a prelude to quoting the passages I referred to, where he said:

“At the risk of labouring excessively the point made in paragraph 10 above about the difference between the development of Z-Core (a matter relevant to ZIC’s business worldwide) and the consequential installation of SAP into the activities of ZIC(UK) (a matter relevant, or primarily relevant, to ZIC’s business in the United Kingdom), I wish to quote a number of passages from the Tribunal’s decision (in addition to the passage quoted in paragraph 9 above, which is also relevant to the same matter) and from documents which the Tribunal had before it. I also quote passages to show that the central role which SAP was to perform was a role within the United Kingdom business of ZIC(UK). I do these things because the Tribunal made a finding that the work on installation of the SAP system was carried out for the benefit both of ZIC(UK) and of ZIC(HO), and in my view ZIC attempts to place on that finding a greater burden than it can bear.”

In paragraph 14 Park J criticised the Tribunal for not explaining the interaction of domestic law under VAT Act 1992 and the Sixth Directive. He proceeded to do so in paragraphs 14 to 29 before coming to the decision of the Tribunal. He started in paragraphs 14 and 15 by pointing out that the Sixth Directive takes priority over VAT Act in that:

“If the Directive requires the national legislature to impose a charge on a particular type of transaction, and the legislature imposes one but does so to a greater extent than the Directive requires, then in my opinion the liability falls to be reduced to the level, if any, which the Directive permits.”

Park J then referred to the relevant provisions of the Sixth Directive (paragraphs 16 and 17) and of the VAT Act (paragraph 18), concluding with some observations on each of them. In paragraph 24 he considered the three decisions of ECJ on which the Tribunal had concentrated, namely Berkholz, DFDS and RAL. In paragraphs 25 to 29 Park J returned to the position under the VAT Act apart from the Sixth Directive. In that connection he considered the application of the test imposed by s.9(4)(b) for the ascertainment of the place of supply of services by reference to “the establishment....at which or for the purposes of which the services are most directly used or to be used...”. In paragraph 27(iv) he concluded:

“In my judgment, on the facts of this case that country can only be the United Kingdom. I refer in this connection to paragraph 13 above, in which I set out various extracts from the decision or from documents which were before the Tribunal, showing that the SAP system (for the installation of which the consultancy services were received) was the top level computer system used in the operations of ZIC(UK). It is true that ZIC(HO) also had an important interest in getting the SAP system installed in ZIC’s United Kingdom premises and activities, because it was a system compatible with Z-Core and gave ZIC(HO) ready access to the records of ZIC’s United Kingdom operations. Nevertheless, to the question of whether the SAP system, for the installation of which the consultancy services of PwC AG were provided, was mainly to be used in the United Kingdom or in Switzerland the only conceivable answer is: in the United Kingdom.”

Park J concluded this section of his judgment by acknowledging that the place of supply rules in the Sixth Directive are critical because:

“If they mean that PwC AG’s supply was made to ZIC in the United Kingdom they do not remove the liability to United Kingdom VAT which arises under ss.8 and 9. If they mean that the supply was made in Switzerland, they do.”

That conclusion is common ground. Thus in argument before us little time was spent on considering the terms of the VAT Act or its interaction with the Sixth Directive. Nevertheless it has been necessary to cover much of the ground that Park J did in order to pick out some passages on which Counsel for ZIC relied.

In paragraphs 30 to 56 Park J considered the decision of the Tribunal. After reviewing its approach Park J stated in paragraph 38:

“I agree with the Tribunal’s approach up to a point: I agree that it was appropriate to ask whether PwC AG’s services were supplied to ZIC at its head office, or to ZIC at its United Kingdom establishment. However, I cannot agree with the answer which the Tribunal gave to the question. In my view, on the facts of this case, the only tenable answer to the question is that the services were supplied to ZIC at its United Kingdom establishments. I respectfully disagree with the Tribunal that the most important consideration was the place at which the contract for the services to be supplied was made. VAT is not charged on the supply of the service of making a contract for services. It is charged on the supply of the services which have been contracted to be supplied.”

In the succeeding paragraphs Park J explained his reasons for that conclusion. The principal reasons are those contained in paragraphs 39 and 40 which I should quote in full. Park J wrote:

“39.

When a Work Order was signed ZIC thereby contracted with PwC AG for PwC AG to provide consultancy services to ZIC’s United Kingdom establishment. I can accept that PwC AG and ZIC made that contract in Switzerland. I can also accept that it was the sort of contract as respects which the head office in Switzerland would, for commercial reasons, want to be involved in the final decision to enter into it, rather than leaving that decision to the United Kingdom establishment alone. But PwC AG did not provide or supply the consultancy services to ZIC at ZIC’s head office by making a contract to provide or supply them. It provided or supplied the services by performing its contract after it had made it. And it performed the contract wholly, or virtually wholly, in the United Kingdom. It performed it through a sub-contractor, PwC(UK), and PwC(UK) fulfilled PwC AG’s contractual obligations entirely in the United Kingdom. PwC(UK) sent its specialist personnel to ZIC’s offices, and it was there that the services which ZIC had contracted for were supplied by (or on behalf of) PwC AG and received by ZIC. In this connection the facts found by the Tribunal are in paragraph 5(19) of the decision:

“(19)

The implementation of SAP by Zurich (UK) was carried out partly by Zurich (UK) staff (60% of the staff, although originally it had been expected to be 75%) and partly by PwC(UK) (40% of the staff) working as a team in Zurich (UK) premises. At the height there were 165 staff working on the project in the UK.”

40.

I accept that, when PwC AG performed the contract by means of what the staff of its subcontractor, PwC(UK), did at ZIC(UK)’s premises in the United Kingdom, there was a sense in which it (PwC AG) provided a service to ZIC(HO) as well as providing a service to ZIC(UK): it provided to ZIC(HO) the service of doing what it had contracted with ZIC(HO) that it would do. The Tribunal, in paragraph 23 of its decision, draws an analogy with the circumstances in Customs & Excise Commissioners v Redrow Group plc [1999] STC 161, in which a first party contracted with a second party that the second party would, in consideration of payment from the first party, provide a service to a third party. There was a supply of services to the first party, which was entitled to input tax credit for the VAT content of what it had paid to the second party. The analogy is apt in some ways, but it does not change my view. It remains the case that what the head office of ZIC wanted was to get the SAP system installed into the operations of ZIC’s establishment in the United Kingdom. It was in order to secure that result that ZIC engaged PwC AG to provide its consultancy services. That result is what ZIC got, and in my view the actual provision of the services to ZIC in the United Kingdom far outweighs in importance the feature that the contract which PwC AG thereby performed in the United Kingdom had been made with ZIC(HO) in Switzerland. In reality the fixed establishment of ZIC ‘to which the service [was] supplied’ (echoing the words of article 9.2(e)) was its establishment in the United Kingdom, and not its head office in Switzerland.”

In succeeding paragraphs Park J referred to other considerations which, in his view, led to the same conclusion. In paragraph 42 he dealt with the conclusion of the Tribunal in paragraph 22 of their Decision (see paragraph 15 above) that the work was done for the benefit of both establishments. He added:

“That is true in the sense that any head office of a business with branches located away from the head office will want its branches to be adequately equipped and organised, and will also want to have efficient access to information about the business which is going on in the branches. But that does not, in my opinion, change the position. The critical point is that, so far as the Work Orders relevant to this case are concerned, PwC AG was engaged to consult on the installation of the new SAP system in the premises and operations of ZIC(UK), not in the premises and operations of ZIC(HO). Of course ZIC(HO) would have wanted to be sure that the system was a good one and that it was efficiently installed. Also ZIC(HO) had a particular concern that the SAP system installed in the United Kingdom should be compatible with ZIC’s Z-Core template. But the operation was still one for the installation of a new system in the United Kingdom establishments, not in the head office establishment in Switzerland.”

In paragraphs 43 to 45 Park J criticised paragraph 24 of the Decision of the Tribunal in which they tested their prima facie conclusion that the place of supply was Switzerland by reference to rationality. He disagreed with their conclusion. Similarly in paragraphs 46 to 50 Park J considered the conclusions of the Tribunal when testing their prima facie view by the yardstick of distortion of competition. In paragraph 51 Park J reiterated that:

“In my judgment the conclusion that PwC AG’s services were supplied to ZIC’s fixed establishment in the United Kingdom is not just the only tenable conclusion on the facts. It is also the conclusion which produces a rational result, which avoids non-taxation in a case where there ought to be taxation, and which avoids distortion of competition.”

In paragraphs 52 to 54 Park J dealt with two points made by counsel for HMRC on which the Tribunal had placed little significance. In each case Park J thought there was more to the point than the Tribunal had recognised. It is not, I think, necessary to deal with either of them. The judge then referred in paragraphs 55 and 56 to two additional points as going to support his view. I need not refer to them either. His conclusion, as expressed in paragraph 57, was:

“For the reasons which I have explained, I consider that on a proper application of the place of supply rule in the Sixth Directive article 9.2(e) PwC AG’s supplies were made to ZIC’s establishment in the United Kingdom. It follows that the result of applying the reverse charge provision in VATA s.8 is the same as the result required to be brought about by the Directive. Accordingly I allow this appeal in principle.”

Counsel for ZIC contend that the decision on the place of supply of a service falling within Article 9(2)(e) is one of fact for the Tribunal so that the appellate courts may only interfere if the Tribunal has erred in law, including a conclusion which no reasonable tribunal could have reached. For this proposition they rely on the decision of Moses J in Commissioners for Customs and Excise v Chinese Channel (Hong Kong) Ltd [1998] STC 347. They point to various passages in the judgment of Park J which, they submit, show that he overlooked this limitation on his jurisdiction.

Counsel for HMRC accept, of course, that the jurisdiction of the appellate court is limited to errors of law as explained in Edwards v Bairstow [1956] AC 14. They suggest that Moses J might have gone further in Chinese Channel than the later decisions of the Court of Appeal in Commissioners of Customs and Excise v Westmoreland Motorway Services Ltd [1998] STC 431 and of the House of Lords in College of Estate Management v Commissioners of Customs and Excise [2005] STC 1597 warranted. But, in any event, so they submit, a careful reading of the judgment of Park J shows that he did not exceed his jurisdiction.

The starting point for any consideration of this issue is the decision of the House of Lords in Edwards v Bairstow [1956] AC 14. The issue in that case was whether the purchase and sale of specific machinery constituted an adventure in the nature of trade so as to justify an assessment to income tax under Case I of Schedule D. The primary facts were found by the General Commissioners who concluded that they did not constitute an adventure in the nature of trade. The appeal of the Inspector of Taxes was dismissed by both Wynn-Parry J and the Court of Appeal on the grounds that the determination of the General Commissioners was one of fact and was not perverse. The appeal of the Inspector of Taxes was allowed by the House of Lords on the ground that the primary facts found by the General Commissioners led inevitably to the conclusion that the transaction was an adventure in the nature of trade.

The classic statement of the law is to be found in the speech of Lord Radcliffe at page 36 in the following terms:

“I do not think that inferences drawn from other facts are incapable of being themselves findings of fact, although there is value in the distinction between primary facts and inferences drawn from them. When the case comes before the court it is its duty to examine the determination having regard to its knowledge of the relevant law. If the case contains anything ex facie which is bad law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that, this has been responsible for the determination. So there, too, there has been error in point of law.”

Later, at pages 38 and 39 he added:

“As I see it, the reason why the courts do not interfere with commissioners' findings or determinations when they really do involve nothing but questions of fact is not any supposed advantage in the commissioners of greater experience in matters of business or any other matters. The reason is simply that by the system that has been set up the commissioners are the first tribunal to try an appeal, and in the interests of the efficient administration of justice their decisions can only be upset on appeal if they have been positively wrong in law. The court is not a second opinion, where there is reasonable ground for the first. But there is no reason to make a mystery about the subjects that commissioners deal with or to invite the courts to impose any exceptional restraints upon themselves because they are dealing with cases that arise out of facts found by commissioners. Their duty is no more than to examine those facts with a decent respect for the tribunal appealed from and if they think that the only reasonable conclusion on the facts found is inconsistent with the determination come to, to say so without more ado.”

In Commissioners for Customs and Excise v Chinese Channel (Hong Kong) Ltd [1998] STC 347 Moses J was concerned with TV broadcasts emanating from Hong Kong transmitted by satellite to subscribers in Europe. It had established its place of business in Hong Kong. An associate company, CCTV, operated in the United Kingdom where it performed services for Chinese Channel. The issue was whether the supply of services by Chinese Channel to its subscribers in the UK should be treated as made in the UK for the purposes of s.9(2) and (5) of the VAT Act. The Commissioners considered that it was because CCTV was a branch or agency of Chinese Channel through which the latter had a fixed establishment in the UK. The Tribunal disagreed. They found that the supply was made from Hong Kong. The Commissioners appealed relying on the provisions of Article 9(1). Moses J considered the Tribunal’s factual conclusions at some length. At page 352 he recorded that:

“...unless they [the Commissioners] can establish that on the primary facts found by the tribunal, the true and only reasonable conclusion is that HK did have a fixed establishment in the United Kingdom from which the services are supplied or, at least, had the tribunal not misdirected itself in law (as to whether a separate legal entity can be a fixed establishment) they might have reached that conclusion on the facts found, in which event the matter should be remitted.”

After considering the judgments of the ECJ in Berkholz and DFDS he continued at page 354:

“In my judgment, the tribunal was entitled, on the facts which it found, to conclude that that service was provided from Hong Kong. It is not just a matter of comparing the activities of the two companies, it is more important, as the tribunal recognised, to consider the significance of those activities and the part they play in their contribution to the service supplied (see final paragraph of p 23). True it is that CCUK appears to have employed a far greater number and can therefore be said to have spent more man hours that HK, but non constat that its activities made an equal or greater contribution to the service. The tribunal clearly took the view that the main contribution consisted of making contracts, arrangements for transmission and selecting programmes. That may have taken less time than it did to perform the production and editorial functions in the United Kingdom, but that is nothing to the point if those United Kingdom activities may be fairly judged to have played a lesser part.”

Finally later on page 354 he concluded that:

“Article 9 requires a factual judgment as to whether the service is supplied from a fixed establishment. The tribunal concluded as a matter of fact that the service was supplied from Hong Kong and not from the United Kingdom. It is plain that CCUK made a contribution to that service. Thus a judgment was required as to whether, despite that contribution, it could be said that the service was supplied from Hong Kong and not from the United Kingdom. This is a question of degree for the tribunal. It may require consideration of which establishment, either the main place of business or the fixed establishment, if any, was most directly concerned. In other words, the test contained in United Kingdom legislation in s 9(2)(b) of the 1994 Act is a test to be used in order to answer the question posed by art 9 of the Sixth Directive. That article, in cases where aspects of the service are provided from the main place of business and others from a fixed establishment, requires a decision as to whether the service is supplied from the fixed establishment. That question cannot be answered by saying that some aspects of the service are and some are not; an overall conclusion must be reached. In my judgment, the commissioners fail because they are unable successfully to impugn the conclusion that, having assessed the contribution made by HK and CCUK to the service, the tribunal concluded that the service was supplied from Hong Kong.”

As I read the judgment of Moses J his conclusion was based on a strict application of the principles of Edwards v Bairstow to the facts and circumstances of that case. I do not read the decision of the Court of Appeal in Commissioners of Customs and Excise v Westmoreland Motorway Services Ltd [1998] STC 431, 435h as suggesting any different test. However three recent decisions of the House of Lords indicate that at least in some areas a classification of goods or services for the purposes of VAT is a question of legal evaluation and therefore of law. Thus in Commissioners of Customs and Excise v British Telecommunications plc [1999] 1 WLR 1376, 1381 Lord Slynn of Hadley referred to the categorisation of a supply as single or split into two or more separate supplies as a matter of law. In Beynon v Commissioners of Customs and Excise [2005] 1 WLR 86, 93 paras 26 and 27 Lord Hoffmann agreed with the Court of Appeal that the categorisation of the supply as one of services or of goods and services was a question of law. To the like effect is the speech of Lord Walker of Gestingthorpe in College of Estate Management v Commissioners of Customs and Excise [2005] STC 1597, 1610 paras 35 and 36.

In both the latter cases Lords Hoffmann and Walker of Gestingthorpe emphasised the need for the appellate court to show circumspection before interfering with the decision of the Tribunal, even though it was on a point of law, “merely because it would have put the case on the other side of the line”. As in the case of the supply of goods and services so, in my view, in the case of the place of supply, the evaluation of the primary facts and the application to them of the provisions of Article 9 of the Sixth Directive as interpreted by the ECJ in cases such as Berkholz, DFDS and RAL is a matter of law. The appellate court is entitled to interfere but should show circumspection before doing so.

With those considerations in mind I turn to the submissions of counsel for ZIC. They complain that in a number of respects the judgment of Park J discloses an illegitimate approach. Into this category they put, particularly, paragraph 6 (quoted in paragraph 19 above), paragraph 27 (quoted in paragraph 22 above) and paragraph 38 (quoted in paragraph 24 above). They submit that these passages and others indicate a willingness on the part of Park J to question the conclusion of the Tribunal inconsistent with the limited jurisdiction he had. I do not agree. The authorities to which I have referred show that he was entitled, indeed bound, to question the conclusions of the Tribunal.

Counsel for ZIC also criticised the judge for going behind the Decision by referring to evidence before the Tribunal and before him. Into this category they put the passages to which I have referred in paragraph 20 above. These criticisms are, in my view, unfounded also. The documents in question had been referred to the judge by counsel without objection. Moreover they illuminate the conclusions of the Tribunal; they do not contradict them. The principal criticism lies in a comparison between paragraph 22 of the Decision of the Tribunal (quoted in paragraph 15 above) and paragraphs 13 and 42 of the judgment of Park J (quoted in paragraphs 20 and 26 above). In the former the Tribunal concluded that the services of PwCAG were for the benefit of both HO and UK in the latter Park J considered that they were “relevant to” UK and the installation of the new system in the premises of UK. But in reaching those conclusions Park J was not substituting findings of his own but reflecting in his own language findings of the Tribunal. I can see no harm in that.

The plain fact is that Park J applied the classic test laid down by the House of Lords in Edwards v Bairstow. In paragraph 27(iv) (quoted in paragraph 22 above) he referred to “the only” conclusion on the facts of the case. In paragraphs 38 and 51 (quoted in paragraphs 24 and 27) he referred to the “only tenable answer”. Having considered the judgment of Park J as a whole and the parts of it of which criticism was made I would reject the submission that he exceeded his jurisdiction.

This is the second issue to which I have referred in paragraph 5 above. The particular error isolated by Park J (in paragraph 38) was the identification by the Tribunal (in paragraph 23) of the place of contracting, namely Zurich, as the most important factor in determining the place of supply. The conclusion of the Tribunal goes back to their understanding of the opinion of the Advocate-General in DFDS as expressed in paragraph 13 of their Decision. In that paragraph the Tribunal stated:

“He [sc. Advocate-General La Pergola] was therefore regarding travel services as provided where the contract for them was made rather than where the underlying supply was made.

DFDS was a company incorporated in Denmark which, amongst other activities, supplied package tours to its customers. Its English subsidiary sold the package tours as its parent’s general sales agent and central booking office. The package tours took their customers to many destinations outside both England and Denmark. The Commissioners for Customs and Excise assessed DFDS to VAT on the consideration paid by the customers for the package holidays on the basis that though its business was established in Denmark the supplies in question were made from a fixed establishment in the UK, namely the premises of the English subsidiary. DFDS contended that the place of supply was Denmark. Thus the choice for the purpose of the relevant provision in Article 26 was between the place where the supplier’s business had been established, namely Denmark, the fixed establishment provided by the English subsidiary in England. The Advocate-General chose England because that was the place of supply to the consumer and to choose Denmark would enable suppliers of services to alter the place of supply merely by moving its registered office.

The ECJ applied the reasoning of the Advocate-General. In paragraphs 20 to 24 the Court stated:

“20.

Moreover, services cannot be deemed to be supplied at an establishment other than the place where the supplier has established his business unless that establishment is of a certain minimum size and both the human and technical resources necessary for the provision of the services are permanently present (see Berkholz (at 2263, para 18)

21.

In this case, to treat, for tax purposes, all the services provided by a tour operator, including those supplied in other member states through undertakings operating on his behalf, as being supplied from the place where the tour operator has established his business, would have the clear advantage, as the Danish company has pointed out, of having a single place of taxation for all the business of that operator covered by art 26 of the Sixth Directive.

22.

However, as the United Kingdom government has pointed out, that treatment would not lead to a rational result for tax purposes in that it takes no account of the actual place where the tours are marketed which, whatever the customer’s destination, the national authorities have good reason to take into consideration as the most appropriate point of reference.

23.

As the Advocate General points out in paras 32 to 34 of his opinion, consideration of the actual economic situation is a fundamental criterion for the application of the common VAT system. The alternative approach for determining the place of taxation of the services of travel agents, based on the fixed establishment from which these services are supplied, is specifically intended to take account of the possible diversification of travel agents’ activities in different places within the Community. Systematic reliance on the place where the supplier has established his business could in fact lead to distortions of competition, in that it might encourage undertakings trading in one member state to establish their businesses, in order to avoid taxation, in another member state which has availed itself of the possibility of maintaining the VAT exemption for the services in question.

24.

In those circumstances, it must be concluded that, where services have been provided by a tour operator from a fixed establishment which that operator has in a member state other than that in which he has established his business, such supply of services to the customer is taxable in the state where that fixed establishment is located.”

This reasoning cannot be transposed to the very different factual context afforded by this case. As Park J pointed out in paragraph 38 of his judgment:

“VAT is not charged on the supply of the service of making a contract for services. It is charged on the supply of the services which have been contracted to be supplied.”

In my view the attribution by the Tribunal of “most importance” to the place of contracting was an error of law. It entitled Park J to reconsider their conclusions.

Thus I turn to the third of the questions which I summarised in paragraph 5 above. Given that I have rejected the contention that Park J exceeded his jurisdiction in substituting his own findings of fact for those of the Tribunal and given that the place of contracting cannot be treated as of “most importance” there is little left in this appeal. It is not suggested that Park J was wrong in any part of his explanation of the relevant provisions of the VAT Act or the Sixth Directive or their interaction. It is common ground that the issue of the place of supply of the services of PwCAG, through PwCUK, under work orders 2 to 10 (both inclusive) must be determined by the application of Article 9(2)(e). It is also common ground that for the purposes of Article 9(2)(e) ZIC has established its business in Switzerland and has a fixed establishment in England.

Park J considered the provisions of the Sixth Directive and the decisions of the ECJ in Berkholz, DFDS and RAL at some length. From these he derived the approach to which he referred in paragraph 36 that Article 9(2)(e):

“...gives two possibilities: (1) the place where ZIC has established its business, or (2) the place where ZIC has a fixed establishment to which the service is supplied. The first question is: which of those two possibilities should be adopted? It is first necessary to ask whether possibility (2) exists on the facts. That is, does ZIC have a fixed establishment elsewhere than where it (ZIC) is established, and was the supply of services made to that fixed establishment? If ZIC does not have a fixed establishment elsewhere or, although it does, the supply of services was not made to it at that establishment, the place of supply will be possibility (1): the place where ZIC has established its business, namely Switzerland. There would be no other possibility. The case would be analogous to Berkholz, in which the taxable person was established in Germany and did not have a fixed establishment anywhere else (the gaming machines on the ferries not being a fixed establishment). If, however, ZIC has a fixed establishment elsewhere than in Switzerland (which it obviously does), and if the services are supplied to that establishment (which is the critical disputed issue), then in my view the place of supply will be where the establishment is located.”

In paragraph 43 Park J recognised the need to test the choice of place of supply, particularly if it was the place of establishment of the business, by reference to rationality meaning in this context the avoidance of conflicts of jurisdiction, double taxation or non-taxation. I did not understand these approaches to be criticised by counsel for ZIC.

The criticism of counsel for ZIC is not to the approaches but to the outcome of their application. Was Park J entitled to reach the conclusion that he did? In my judgment he was. I agree with him that on the facts found by the Tribunal the only tenable outcome of the proper application of Article 9(2)(e) is the conclusion that the place of supply was the United Kingdom. I detect no error of law in the reasoning or conclusion of Park J.

For the reasons I have given I conclude that (1) Park J did not exceed his jurisdiction, (2) the conclusion of the Tribunal was vitiated by an error of law and (3) the decision of Park J was right for the reasons he gave. In these circumstances I would dismiss this appeal.

By virtue of section 8 and Schedule 5 of VATA, consultancy services are supplied where they are received and, if the recipient “belongs” in the United Kingdom, VAT is chargeable in the United Kingdom. By virtue of section 9(4) of VATA a recipient of services is treated as belonging in a country if, having an establishment both in that country and elsewhere, the establishment at which or for the purposes of which the services are most directly used (or to be used) is in that country. Zurich has its head office in Switzerland and a branch in the United Kingdom. Both the head office and the branch are establishments for the purpose of section 9 of VATA; the question therefore is which of the two is the establishment at which for the purpose of which PWC AG’s consulting services were most directly used.

It was common ground that this is the same question that arises under the Sixth Directive according to which VAT is chargeable at the place where a customer has established his business or has a fixed establishment to which the service is supplied. The cases decided by the European Court of Justice decide that services are supplied at an establishment in the form of the place of the registered office unless that conclusion is irrational and that the test of rationality is largely governed by considerations of economic reality. Since VAT cannot, by virtue of Article 1 of the Sixth Directive, be charged in circumstances which are not permitted by the Directive, the English legislation has to be read consistently with the Directive and it is for this reason that the courts have to decide to which of the two establishments it is more rational that VAT be charged. It is for that reason that the concept of rationality as developed in the European case law is the criterion by which to judge the question of where VAT is to be charged.

No challenge is made (or could be made) to the primary facts as found in paragraph 5 of the Tribunal’s reasoning. The combined effect of paragraphs 5(19) and 5(20) is that Zurich (HO) required the SAP to be installed in its local branches and that Zurich UK requested SAP for its financial reporting and accounting needs and, indeed, Zurich UK could not operate without the installation of SAP (or an equivalent). Moreover the implementation of SAP was carried out by Zurich UK staff (60% of the work force) and PWC UK staff (40% of the work staff) as a team working in Zurich UK premises. It thus appears that the installation services of the installers and the consultancy services of PWC AG were both received by Zurich UK in London.

The tribunal nevertheless paid less regard to the place where the consultancy services were rendered because they thought the question was not where the supply took place but who the customer was. In order to identify the customer they considered the place of contracting to be the most important factor. They regarded the place of benefit as the least important factor since neither of the two establishments benefited to the exclusion of the other.

It seems to me that there are two errors here. To focus on the identity of the customer begs the very question which has to be answered. The customer is Zurich Insurance Company, a company with its registered office and head office in Switzerland and a branch in London. If one asks who the customer is, it is natural to conclude that the customer is the Swiss corporate entity. But Article 9(2)(e) of the Sixth Directive requires one to focus on the place “where the customer has established his business or has a fixed establishment to which the service is supplied”. It is here agreed that the customer has two establishments; identifying the customer does not assist in determining the place where or to which it is more rational to say that the service has been supplied.

Secondly, whether one is seeking to identify the place where or to which the service is supplied on the one hand or one is seeking to identify the customer on the other, it cannot be right to say that the place of contracting is the most important factor. The place where a contract happens to be made is often adventitious. It will be important to ascertain which party is the offeror and which party is the offeree. Different rules apply, as a matter of English law, in the case of contracts made by post from those which apply in the case of instantaneous communication. For these reasons (among others), the place of contracting is usually regarded as unimportant in ascertaining the governing law of any contract, see Dicey and Morris, Conflict of Laws, 11th edition pages 1166-1167, 1209-1210 and Dicey Morris and Collins, Conflict of Laws, 14th edition para 32-003. It is equally unimportant in identifying the place to which a service is supplied.

Once these errors are established, the decision of the Tribunal cannot stand. If one then asks whether it is rational to say that the consultancy services in issue were supplied to Zurich HO in Switzerland where Zurich has established its business, there can only be one answer. For the reasons given by the judge and my Lords it is evident that it would be irrational to say that they were supplied to Zurich HO where the services were not performed and infinitely more rational to say that they were supplied to Zurich UK where they were performed.

For these reasons, I agree that the appeal should be dismissed.

I agree that the appeal should be dismissed.

The provisions of Article 9 of the Sixth VAT Directive dealing with the place of supply of services are not identical with those of sections 7 and 9 of the Value Added Tax 1994, and it is common ground that Zurich may rely on the relevant provisions of the Sixth Directive to the extent that they would avoid the reverse charge on supplies received from abroad. This is because (a) by virtue of the European Communities Act 1972, section 2, directly effective Community law rights are given effect in United Kingdom law; (b) wherever possible, national law should be construed in such a way as to be compatible with the provisions of the directive: Case C-106/89 Marleasing SA v La Comercial Internacional deAlimentacim SA [1990] ECR I-4135; (c) provisions of a directive which are sufficiently clear and precise, and which have not been implemented by the member state, may give rise to directly effective rights such that the Member State cannot rely on provisions of its national law which are incompatible with those rights; and (d) the provisions of Article 9 are of direct effect in that sense. See Marks and Spencer plc v Customs and Excise Commissioners [2003] EWCA Civ. 1448, [2004] STC 1, paras 10-11.

There have been several rulings by the European Court on Article 9, the most significant of which for the purposes of this appeal are Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Alstadt [1985] ECR 2251 and Case C-260/95 Customs and Excise Commissioners v DFDS A/S [1997] ECR I-1005, [1997] STC 384. Most of the decisions concern Article 9(1) and not the special rules in Article 9(2), but the relevant wording is identical and nothing turns in this appeal on the differences between the provisions.

The ruling in Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Alstadt [1985] ECR 2251 concerned the place of supply by a German company of gaming services on board a ship which sailed in Danish waters. One of the questions raised by the Finanzgericht was whether Article 9(1) should be interpreted to mean that the term “fixed establishment” also covered facilities for conducting a business (for example the operation of gaming machines) on board a ship sailing on the high seas outside the national territory, and, if so, what were the relevant criteria for the existence of a “fixed establishment”.

In answering the question the European Court said (paragraph 14):

“14.

…Article 9 is designed to secure the rational delimitation of the respective areas covered by national VAT rules by determining in a uniform manner the place where services are deemed to be provided for tax purposes. Article 9(2) sets out a number of specific instances of places where certain services are deemed to be supplied, whilst Article 9(1) lays down the general rule on the matter. The object of those provisions is to avoid, first, conflicts of jurisdiction, which may result in double taxation, and secondly non-taxation, as Article 9(3) indicates, albeit only as regards specific situations.

…

17.

… [I]t is for the tax authorities in each Member State to determine from the range of options set forth in the directive which point of reference is most appropriate to determine tax jurisdiction over a given service. According to Article 9(1), the place where the supplier has established his business is a primary point of reference in as much as regard is to be had to another establishment from which the services are supplied only if the reference to the place where the supplier has established his business does not lead to a rational result for tax purposes or creates a conflict with another Member State.

18.

It appears from the context of the concepts employed in Article 9 and from its aim, as stated above, that services cannot be deemed to be supplied at an establishment other than the place where the supplier has established his business unless that establishment is of a certain minimum size and both the human and technical resources necessary for the provision of the services are permanently present. It does not appear that the installation on board a seagoing ship of gaming machines, which are maintained intermittently, is capable of constituting such an establishment, especially if tax may appropriately be charged at the place where the operator of the machines has his permanent business establishment.

19.

… Article 9(1) … must be interpreted as meaning that an installation for carrying on a commercial activity, such as the operation of gaming machines, on board a ship sailing on the high seas outside the national territory may be regarded as a fixed establishment within the meaning of that provision only if the establishment entails the permanent presence of both the human and technical resources necessary for the provision of those services and it is not appropriate to deem those services to have been provided at the place where the supplier has established his business.”

Advocate General Mancini (page 2255) said that in determining which of the two main criteria laid down in Article 9(1) should be relied on where the place where the supplier had established his business did not coincide with the fixed establishment, said that he proposed to rely on the general principle that VAT should be charged at the place of consumption and therefore preference should be given to the criterion which enabled the supply of services to be located more accurately. There was no doubt that the more appropriate of the two for that purpose was the criterion of the “fixed establishment” which was clearly more precise.

The second ruling of importance for the purposes of the present case is Case C-260/95 Customs and Excise Commissioners v DFDS A/S [1997] ECR I-1005, [1997] STC 384. The facts which appear from the judgment of the European Court and the Opinion of Advocate General La Pergola are as follows. DFDS, a company incorporated in Denmark, engaged in shipping, travel and general transport, had a wholly-owned English subsidiary, DFDS Ltd. The subsidiary operated in Harwich as a commercial agent for its parent company, DFDS, selling package tours organized by the latter. An agency agreement concluded by the two companies designated the subsidiary as a general sales and port agent for DFDS in the United Kingdom and as central booking office for the United Kingdom and Ireland for all the passenger services of DFDS. The premises of the English subsidiary belonged to it and not to DFDS.

The English company had to deal with passengers’ complaints. It was not authorised to work for other passenger transport companies without DFDS’s prior consent. DFDS paid a gross commission of 19% on all fares sold by the English company. The English company had access, through a terminal in Harwich, to DFDS’s central computer in Copenhagen, which contained information on the availability of passenger space and hotel accommodation. Where the trip or accommodation requested was available, the reservation was accepted and the English company provided the passenger with the documentation, which was issued in the name and on behalf of DFDS. The English company carried on directly the business of marketing and advertising, but coordinated its activities with the commercial division of the DFDS, which reimbursed the advertising expenses incurred.

The Commissioners took the view that VAT was payable by DFDS on the package tours marketed on its behalf by its English subsidiary, because as a result of the agreement with its subsidiary, DFDS established its business in the United Kingdom or made the supplies in question from a fixed establishment in the United Kingdom. DFDS’s position was that the services were taxable at the place where it had established its business, namely Denmark, which had exempted such services from VAT.

The VAT Tribunal decided that DFDS had its principal place of business in Denmark and could not be subject in the United Kingdom to VAT on services sold in Harwich. The criterion of the place where the supplier had established his business took precedence over the criterion of the fixed establishment; and the human and technical resources of the English company must be regarded as constituting the fixed establishment of that company and not of the parent company DFDS.

The question referred by the High Court was:

“On the proper interpretation of … Article 26 …, where a tour operator has its headquarters in Member State A but supplies services in the form of package tours to travellers through the agency of a company in Member State B: (a) in what (if any) circumstances is the supply of those services by the tour operator taxable in Member State B? (b) in what (if any) circumstances can it be said that the tour operator "has established its business" in Member State B or "has a fixed establishment from which it has provided the services" in Member State B?”

The European Court characterised the question as seeking to determine under what conditions the services which a tour operator established in one Member State provides to travellers through the intermediary of a company operating as an agent in another Member State are liable to VAT in the latter State under Article 26. The European Court said that Article 26(2) used the same concepts of place where a supplier’s business was established and fixed establishment as those used in Article 9(1) to define the two main fiscal points of reference which may be applied to supplies of services in general. It was therefore appropriate to refer to the rules arising from that definition of place of supply: paras 16 and 17.

Applying Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Altstadt [1985] ECR 2251 the European Court said that, for the purposes of Article 9(1), the place where the supplier had established his business was a primary point of reference inasmuch as regard was to be had to another establishment from which the services were supplied only if the reference to the place where the supplier had established his business did not lead to a rational result for tax purposes or created; and services could not be deemed to be supplied at an establishment other than the place where the supplier had established his business unless that establishment was of a certain minimum size and both the human and technical resources necessary for the provision of the services were permanently present: paras 18-20.

The approach of the European Court was to consider, first, what the hierarchy would be if the tour operator had a fixed establishment from which it marketed tours and that establishment was in a State other than the State in which it had established its business, and then, second, whether it had such a fixed establishment.

On the first question, the Berkholz hierarchy, the Court said that to treat, for tax purposes, all the services provided by a tour operator, including those supplied in other Member States through undertakings operating on his behalf, as being supplied from the place where the tour operator had established his business, would have the clear advantage of having a single place of taxation for all the business of that operator covered by Article 26 of the Sixth Directive: para 21. But, the Court said (para 22),

“that treatment would not lead to a rational result for tax purposes in that it takes no account of the actual place where the tours are marketed which, whatever the customer's destination, the national authorities have good reason to take into consideration as the most appropriate point of reference.”

Approving the Advocate General, the Court said that consideration of the actual economic situation was a fundamental criterion for the application of the common VAT system. The alternative approach for determining the place of taxation of the services of travel agents, based on the fixed establishment from which these services were supplied, was specifically intended to take account of the possible diversification of travel agents’ activities in different places within the Community. Systematic reliance on the place where the supplier had established his business could lead to distortions of competition, in that it might encourage undertakings trading in one Member State to establish their businesses, in order to avoid taxation, in another Member State which had availed itself of the possibility of maintaining the VAT exemption for the services in question: para 23.

In those circumstances, where services had been provided by a tour operator from a fixed establishment which that operator had in a Member State other than that in which he had established his business, such supply of services to the customer was taxable in the State where that fixed establishment was located: para 24.

In order to determine whether, in circumstances such as those of the case, the travel agent actually had such an establishment in the Member State in question, it was necessary first to ascertain whether or not the company operating in that State on behalf of the agent was independent from him: para 25.

The fact that the premises of the English subsidiary, which had its own legal personality, belonged to it and not to DFDS was not sufficient in itself to establish that the subsidiary was in fact independent from DFDS. The fact that the subsidiary was wholly owned by it, and the various contractual obligations imposed on the subsidiary by its parent, showed that the company established in the United Kingdom merely acted as an auxiliary organ of its parent: para 26.

Second, it was necessary to verify whether the establishment in question was of the requisite minimum size in terms of necessary human and technical resources. It was apparent from the facts, particularly as regards the number of employees of the company established in the United Kingdom and the actual terms under which it provided services to customers, that that company did display the features of a fixed establishment: paras 27-28.

Accordingly the answer was that Article 26(2) was to be interpreted as meaning that, where a tour operator established in one Member State provided services to travellers through the intermediary of a company operating as an agent in another Member State, VAT was payable on those services in the latter State if that company, which acted as a mere auxiliary organ of the tour operator, had the human and technical resources characteristic of a fixed establishment.

In the present case the Tribunal relied on the Opinion of Advocate General La Pergola in DFDS. In his opinion, DFDS Ltd could not be regarded as an independent agency. The ownership of all the capital of the subsidiary company was indicative of its dependency on its parent; and the English company did not market tours organised by a very large number of tour operators. Its contractual link with its parent meant that its agency business could be carried on only in relation to the parent, unless the latter had expressly consented otherwise. The subsidiary had no effective independence from DFDS in the conduct of its business. The same conclusion followed from the need for prior approval from DFDS regarding management of the subsidiary company, such as the appointment of senior staff, the conclusion of major contracts, the appointment of advertising and public relations agents, and the lack of any discretion in setting the prices of services. It did not seem in fact to bear any financial risk under the contracts it concluded with consumers in the course of its agency work on behalf of DFDS. The English company was therefore an auxiliary organ forming part of DFDS from the economic point of view.

It was a fixed establishment of DFDS. There was actual pursuit of an economic activity, it was pursued for an indefinite period and there was a fixed establishment. The English company had about 100 employees. The contract was concluded in the United Kingdom; it might be presumed that payment was made in local currency; any complaints from customers would be dealt with by the English company; and DFDS reimbursed any expenses incurred by the English company in legal proceedings to protect its interests.

It was for the competent authority in each State to determine to what extent one of the two criteria should be applied rather than the other. The European Court was called on to explain and oversee fulfilment of the requirements on which the choice of one criterion rather than the other should be based. Thus attention had to be focused on the consequences that would flow from the general criterion of the place where the supplier had established his business. If the result was rational, as intended by the directive, that is the rule to be preferred. There was no need for the other, which concerned the place of the fixed establishment.

The Advocate General aligned himself with the view advanced by the United Kingdom Government, which was that the problem was to be resolved by reference to the general principles laid down in Community tax legislation, including the requirement that VAT be levied at the place where the service was provided. Reference to the place where the supplier had established his business did not lead to a rational result. The first consequence of such an approach would in fact be failure to apply the legislative criterion that the place of taxation must fundamentally coincide with that at which the service was supplied to the consumer. The VAT system had to be applied in a manner as far as possible in harmony with the actual economic situation.

Application of the place where the supplier had established his business would exacerbate the problems, rather than simplifying them. If undertakings in the sector were allowed freely to determine, by choosing the location of their registered office, the place at which the services provided by them were to be taxed, there would be distortion of freedom of competition and other, more wide-ranging, repercussions for the business world.

To accept the criterion of the registered office in such a case resulted in distortion of competition between undertakings operating in the same market. In the case before the Court, tour operators in the United Kingdom would be discriminated against for establishing their headquarters in one place rather than another. Some of them would be subject to VAT on the services provided by them and others would not.

The Advocate General concluded that the scope of Berkholz must not be unjustifiably extended by construing it as meaning that the criterion of the establishment from which the services were provided is necessarily merely residual.

In Case C-190/95 ARO Lease BV v Inspecteur der Belastingdienst Grote Ondernemingen [1997] ECR I-4383, [1997] STC 1372 a Dutch car financing company (ARO) leased cars, mainly to Dutch customers, but also to some Belgian customers. All leasing agreements were drawn up in the Netherlands. ARO had no office in Belgium and customers were introduced to it through Belgian self-employed intermediaries. The Belgian tax authorities considered that VAT should be paid on the basis that the presence of a fleet of cars in Belgium meant that ARO had a fixed establishment there, and therefore Belgium was to be treated as the place of supply. The Netherlands tax authorities refused to reimburse the VAT, disputing that ARO had a fixed place of business in Belgium. The European Court noted (para 18) that the services supplied in the leasing of vehicles consisted principally in negotiating, drawing up, signing and administering the agreements and making the vehicles physically available. The Court ruled that when a leasing company did not possess either its own staff or a structure which had a sufficient degree of permanence to provide a framework in which agreements might be drawn up or management decisions taken and thus enable the services in question to be supplied on an independent basis, it could not be regarded as having a fixed establishment in that sense: para 19. Advocate General Fennelly expressed the view that the essence of the service comprised the conclusion of the contracts: para 31. See also Case C-429/97 EC Commission v France, [1993] ECR I-5881, [2001] STC 156 (composite supply to be taken as being from the Member State in which the supplier has established his business).

Neither of the other rulings to which we were referred involved any consideration of the factual places of supply of services Case C-452/03 RAL (Channel Islands) v Customs and Excise Commissioners [2005] ECR I-3947,[2005] STC 1025; Case C-231/94 Faaborg-Gelting Linien A/S v Finanzamt Flensburg [1996] ECR I-2395, [1996] STC 774.

The only decision to which we were referred which was directly on place of supply was the decision in Customs and Excise Commissioners v Chinese Channel (Hong Kong) Ltd [1998] STC 347 (Moses J). In that case the issue for the Tribunal was whether Chinese language satellite programmes provided to subscribers in England were supplied from a Hong Kong company or whether they were supplied from its United Kingdom affiliate as a fixed establishment. The Hong Kong company held the broadcasting licence, made arrangements for transmission and selected programmes. The English company marketed subscriptions, checked subscribers’ credit ratings, collected subscriptions and received and edited tapes of programmes to be broadcast. The Tribunal decided on the facts that the service was provided from Hong Kong and not from the United Kingdom. Moses J held that the decision was one of degree for the Tribunal, and one with which the court would not interfere.

For present purposes, under Article 9(2)(e) the place where services of consultants are supplied when performed for customers established outside the Community “shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied ..”

In the present case, for the purposes of Article 9 Switzerland is the place where ZIC has established its business. Nor can there be any doubt that ZIC(UK) is a fixed establishment of ZIC. Mr Prosser QC for ZIC virtually conceded that if the United Kingdom is the place to which the services were provided there is no basis for the place where ZIC has established its business (Switzerland) being regarded as the place where the service is deemed to be supplied for the purposes of Article 9(2)(e) under the Berkholz hierarchy.

The principal question for Park J was whether the Tribunal erred in law or came to a conclusion on the facts which can be disturbed in accordance with Edwards v Bairstow principles.

At the end of paragraph 13 the Tribunal treated the Advocate General as having the opinion in DFDS that travel services were provided where the contract for them was made rather than where the underlying supply was made. The Tribunal said (citing paragraphs 32 and 35 of the Advocate General’s opinion):

“His opinion that the place of supply was at the place of the fixed establishment was based on the principle that taxation should coincide with the place of supply to the consumer applied in harmony with the actual economic situation. He was therefore regarding travel services as provided where the contract for them was made rather than where the underlying supply was made.”

In paragraph 16 the Tribunal said that in DFDS the European Court was applying the economic situation not to the underlying supplier of travel services but to determining whether there was “a fixed establishment from which the service is supplied”. The Tribunal said: “In other words, the place from which the supply of the single travel service was made was determined by where the contract was made, the documentation issued and the consideration paid.”

At paragraph 17 the Tribunal said that it had to choose between the two possibilities on the basis of rationality, economic reality and distortion of competition. The Tribunal considered (at paragraphs 18 and 19), in the context of economic reality, the place of contracting, and at paragraph 23, weighing up these factors in terms of economic reality as understood in DFDS, they regarded the place of contracting as the most important.

These passages were based on a misunderstanding of the European Court’s ruling, and of the Advocate General’s opinion.

First, when the Court referred in paragraph 22 of the ruling to “the actual place where the tours were marketed … whatever the customer’s destination” it was drawing a distinction between the place where the services were provided (England) and the place where the business was established (Denmark). The English company was selling package tours, and the Court was plainly not deciding that the place where the contract was made was the place where the services were provided rather than the place of the customer’s destination.

So also when the Court approved in paragraph 23 of the ruling the Advocate General’s reference to “the actual economic situation” it was in the context of applying the hierarchy, and the reference to the English company being “the fixed establishment from which these services were supplied” was simply a re-iteration of what had gone before. It was not a holding that the actual economic situation meant that the place of contracting was more important than the place where the customer travelled in determining the place from which the services were supplied.

Second, the Tribunal misunderstood the context of these passages from the Advocate General’s opinion on which it relied:

“32.

I feel … able to align myself with the view advanced by the United Kingdom Government. I am also of the opinion that reference to the place where the supplier has established his business does not in this case lead to a rational result. The first consequence of such an approach would in fact be failure to apply the legislative criterion that the place of taxation must fundamentally coincide with that at which the service is supplied to the consumer. That is the basic criterion: the VAT system must be applied in a manner as far as possible in harmony with the actual economic situation. I do not consider it logical for the subsidiary criterion, when the possibility of applying it is assessed, to be automatically treated as being subordinate to that of the place where the supplier has established his business.

…

35.

The view put forward by the Danish company is not in conformity with those principles - in fact it errs towards formalism. It fails to take account of the fact that the economic realities of this case justify making travel agency business subject to VAT at the place where the services are provided …”

There is nothing in these passages to suggest that the Advocate General was expressing the view that as a general principle the place where the contract was made was the place where the services were provided. He was discussing there whether the English company was a fixed establishment. It was in that context that he said that the problem was to be resolved by reference to the general principles laid down in Community tax legislation, including the requirement that VAT be levied at the place where the service was provided; and by reference to the legislative criterion that the place of taxation must fundamentally coincide with that at which the service is supplied to the consumer.

So also in another passage he referred to the contract being concluded in the United Kingdom, and referring to the criteria for a fixed establishment:

“26.

Let us now consider whether the requirements laid down by the Court in those decisions are met in this case. In my opinion they are. There is actual pursuit of an economic activity, it is pursued for an indefinite period and there is a fixed establishment. All those points are confirmed by the detailed examination of the facts undertaken by the VAT Tribunal. The decision adopted by that tribunal highlights a number of factors, the most important of which - and here I share the view expressed by the Commission's representative at the hearing - is the fact that the English company has about 100 employees. And there is no shortage of other considerations of a factual nature to support the view that, in addition, the service offered to consumers originates in the United Kingdom. The contract is concluded in the United Kingdom; it may be presumed that payment is made in local currency; any complaints from customers will be dealt with by the English company; and the parent company reimburses any expenses incurred by DFDS Ltd in legal proceedings to protect its interests.” (emphasis added)

The reference to the contract being concluded in the United Kingdom is plainly in the context of determining whether the English company was a fixed establishment of the Danish company. Accordingly he considered it relevant that the contract was concluded at the English subsidiary rather than at head office. He was not considering the question whether the services were being supplied from that office as distinct from the place where the customers travelled.

Consequently DFDS had no bearing on the question before the Tribunal, and the Tribunal was wrong to treat it as the basis for its central findings in paragraphs 19 and 23 that the place of contracting was the most important factor.

That misunderstanding, and the consequent conclusion, was an error of law. There was no dispute as to the facts, and Park J was entitled to substitute his own evaluation, and, in common with the Chancellor, I consider that the conclusion is the only one to which he could have come.